Page 18 - Business Insights Technology Industry

DEMYSTIFYING DEFERRED TAXES
IN ACCOUNTING

UNDERSTANDING DEFERRED TAX EXAMPLES OF DEFERRED
ASSETS/LIABILITIES TAX ASSETS/LIABILITIES

ASC 740: INCOME TAXES - A deferred tax asset arises when a company’s One common scenario giving rise to deferred
current year taxable income is greater than its
AN OVERVIEW
tax assets is the carryover of losses on a
I n the realm of financial reporting Accounting Standards Codification (ASC) financial statement income due to temporary company’s tax return, called net operating
and accounting, deferred taxes wield
differences in taxability of certain items that
considerable influence. Understanding loss carryforwards (NOLs), to offset taxable
its nuances is crucial for any business striving 740 mandates the asset and liability method will reverse in future tax years. In essence, income in subsequent years. Disparities
for accuracy and transparency in its financial for accounting for income taxes. Under this the company is paying more tax in the current between accounting rules and tax rules for
statements. Among the myriad facets of method, companies recognize deferred tax year than its financial statement net income other accounting areas, such as bad debt
would require but will pay less tax in future
accounting for deferred taxes are assets and assets and liabilities based on disparities years when taxable income will be lower than expense and warranty expense also commonly
between the carrying amounts of assets and
liabilities, valuation reserves, allowances, liabilities on financial statements and their its financial statement net income. contribute to the creation of deferred tax
and the intricate calculations involved. Let’s assets, as such costs are generally not
delve into these elements and demystify the corresponding tax bases, which in turn gives immediately tax deductible when recognized
realm of deferred taxes, an area that is usually rise to differences between taxable income A deferred tax liability arises when a for financial statement purposes.
company’s current year taxable income is less
ignored by internal accountants and reserved and financial statement income. Deferred than its financial statement income, again,
tax assets and liabilities are recognized on a
for the likes of auditors and tax preparers. But company’s balance sheet as non-current, to due to temporary differences in taxability of Common scenarios giving rise to deferred tax
we feel it’s beneficial to educate the startup liabilities include depreciation expense, which
and technology sectors so they can best be reversed in future years as taxable income certain items that will reverse in future tax is commonly accelerated for tax purposes
approach and deal with the intricacies of this related to the temporary difference reverses in years. In essence, the company is paying compared to the financial statements, and
less tax in the current year than its financial
subject. future years. prepaid expenses, which are generally tax
statement net income would require but will deductible when paid, but not recognized as
pay more tax in future years when taxable an expense in the financial statements until
income will be higher than its financial incurred.
17 statement net income. 18